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Government cutbacks hold U.S. recovery in check

These are stories Report on Business is following Friday, Jan. 27, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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U.S. growth at 2.8 per cent The U.S. economy picked up steam in the fourth quarter of last year, though by less than expected, and it may not mean all that much at this point regardless. It's interesting to look at where the trouble is, too, and what that hints at going forward.

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"What was a little surprising was where the strength came from, and where it didn't," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"Government spending was slashed, which really weighed on growth (it subtracted 0.93 percentage points from the headline). And within the government, the winding down of the war effort was evident as national defence spending was hit by a 12.5-per-cent cut, while non-defence spending rose for the first time in a year. State and local governments continued to cutback as well, down 2.6 per cent."

Certainly, overall growth of 2.8 per cent annualized marked the fastest pace in more than 18 months, which bodes well. But it's not enough to make a meaningful dent in the country's jobless rate.

Earlier this week, as it forecast interest rates will remain at their emergency lows through late 2014, the U.S. central bank also projected overall growth of 2.2 per cent to 2.7 per cent this year, 2.8 per cent to 3.2 per cent in 2013, and 3.3 per cent to 4 per cent a year later.

Unemployment was forecast at 8.2 per cent to 8.5 per cent for 2012, 7.4 per cent to 8.1 per cent next year, and 6.7 per cent to 7.6 per cent in 2014.

There were some stronger signs in today's report from the U.S. Commerce Department, notably that consumers are opening their wallets more. But growth in business investment slowed, and governments continued to slash and burn.

"The report was a bit softer than expected because much of the growth came from inventory accumulation rather than final sales," said senior economist Krishen Rangasamy of National Bank. "That said, the inventory refills break a string of two successive quarters of drag from inventories, and are a sign that businesses are confident that demand will come back."

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Watsa backs RIM The newest member of the board at Research In Motion Ltd. is putting more money where his mouth is.

Prem Watsa, his Fairfax Financial Holdings Ltd. , and related companies purchased shares on Wednesday and again yesterday, boosting the stake to more than 5 per cent, The Globe and Mail's Tara Perkins reports.

That comes just days after Mr. Watsa joined the RIM board in last Sunday's dramatic shakeup, and is a vote of confidence in the new team and the outlook for the company.

RIM shares have bounced around this week, sinking initially after Thorsten Heins was named chief executive officer and Barbara Stymiest chair as Mike Lazaridis and Jim Balsillie stepped down from those jobs, which they shared.

The stock rebounded on Wednesday, sinking slightly again yesterday.

Ford cites challenges Ford Motor Co. reported a massive fourth-quarter profit today, the best in its history, but it got a mighty boost from a tax gain of $12.4-billion (U.S.).

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When you strip that out, operating profit dipped on more sluggish sales outside its North American base.

Ford earned $1.6-billion or $3.40 a share in the quarter, obviously well up from the $190-million or 5 cents of a year earlier. But when the tax gain is excluded, operating profit slipped to $1.1-billion or 20 cents a share, shy of analysts' estimates.

The auto maker was hit by the Thai floods, as other manufacturers have been, but also by the turmoil in Europe, whose troubles are having a widening impact well beyond the euro zone.

"We are making consistent progress on our commitment to deliver great products, invest for global growth, build a strong business and provide profitable growth for all," said chief executive officer Alan Mulally. "We recognize we have challenges and opportunities ahead. "

Unemployment a crisis in Spain Almost half of Spain's young people and almost one-quarter of its broader population are now out of work.

Spain's unemployment, already the highest in the struggling euro zone, jumped in December to 22.8 per cent as the number of people searching for jobs topped 5 million.

The latest numbers pile more pressure on Prime Minister Mariano Rajoy, whose government has unveiled fresh austerity measures.

Upgrades, downgrades, revisions UBS Securities Canada analyst Brian MacArthur cut his 12-month price target on shares of Potash Corp. of Saskatchewan to $60 (U.S.) from $65, and held his rating at "buy" after the potash giant's earnings yesterday: "North American potash volumes were down substantially while offshore pricing decreased as more sales were made to lower-netback regions. However, contributions from its potash investments (worth $10/share) increased."

CanaccordGenuity's Keith Carpenter cut his Potash target to $58 from $60, but still rates the stock a "buy."

Analysts at UBS and Desjardins raised their price targets on shares of Canadian Pacific Railway Ltd. in the wake of its results yesterday. Benoit Poirier of Desjardins hiked his target to $76 (Canadian) from $70, but held his rating at "hold," while Hilda Maraachlian of UBS boosted the target to $75 from $73, with a "neutral" rating. "We are confident that CP can drastically improve its operating ratio over the coming years, as the involvement of Bill Ackman - regardless of whether he succeeds or not - should bring a renewed operational focus to CP," said Mr. Poirier, referring to Mr. Ackman's Pershing Square Capital Management, which is seeking to bring in a new CEO.

CanaccordGenuity's Robert Young cut his target on shares of Celestica Inc. to $10 (U.S.) from $11, and held his "buy" rating after its earnings: "Revenue guidance for Q1 and 2012 was weaker than we expected but more importantly, Celestica continues to expect a consistent operating model with operating margins of 3.5 per cent to 4 per cent, in line with our view."

Mario Mendonca of CanaccordGenuity trimmed his price target on shares of Bank of Nova Scotia to $57 (Canadian) from $58, and maintained his "hold" rating: "We are lowering our 2012E and 2013E EPS to $4.69 (from $4.73) and $5.05 (from $5.14), respectively."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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